DP3267 Did Sunspot Forces Cause the Great Depression?
We apply a dynamic general equilibrium model to the period of the Great Depression. In particular, we examine a modification of the real business cycle model in which the possibility of indeterminacy of equilibria arises. In other words, agents' self-fulfilling expectations can serve as a primary impulse behind fluctuations. We find that the model, driven only by these measured sunspot shocks, can explain well the entire Depression era; that is, the decline from 1929-32, the subsequent slow recovery and the recession that occurred in 1937-38.